Given that Spain is under enormous pressure from Germany to bailout its banks, we are going to test his theory shortly. As regular readers know, Spain's financial system is designed so that it doesn't need to bailout its banks.
It needs to adopt the Swedish Model with ultra transparency. This results in the banks absorbing all the losses in the Spanish financial system and providing the data to prove the point. As shown by Iceland several years ago, this solution protects the real economy and Spanish society and sets the stage for growth.
Mr. Tucker includes many recommendations for what banks could do to make themselves less likely to need a bailout including living wills (which won't work in a financial crisis) and breaking up into smaller banks (which bankers won't do because it would cut their pay).
Completely absent from the list was the one solution that would work: require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
With this information, banks and other market participants could independently evaluate the risk of each bank and adjust the amount of their exposures to each bank to what they can afford to lose given the risk of the bank.
This ends the risk of contagion and with it any justification for bailing out the banks.
Mr Tucker ... said it was in the industry’s own interests to set up so-called “living wills” that would help regulators manage a “speeded-up Chapter 11 [bankruptcy] and recapitalisation” programme that would protect taxpayers from another round of multi-billion pound bail-outs.
He also made a veiled attack on the concentration of power in Britain’s big four banks, saying that more operators and more competition would be better for financial stability and the economy.
The UK taxpayer is still propping up the banking system with £228bn of loans and guarantees, according the National Audit Office, and the rescue drained £2.4bn of cash from the public purse last year....
“The objective is to get to a position where public money is never used to provide solvency support for a bank failure. This is hugely in the interests of the industry because the effect is to politicise banking.If the objective is to never use public money, the only way to achieve that is by requiring the banks to provide ultra transparency. It is only by ending the risk of contagion that bankers are stripped of their ability to 'scare' policymakers into bailouts.
“If there is to be another episode of massive taxpayer solvency support to sort out a crisis once we’ve eventually got through this one I think the backlash would be almost uncontainable.”Clearly, Greece is showing what happens when policymakers go to the bailout trough once to much.
Spain is on the verge of providing further confirmation that we have reached the end of the line bailing out the banks.
Your humble blogger has said repeatedly that bailouts are the wrong solution. Apparently what is needed to get policymakers attention so they stop listening to the banks is literally massive protests and social upheaval.
Bank resolution plans are also vital to lowering the levels of capital that they must hold, he added. Without such a safety net, “the capital surcharge would be considerably bigger than it is going to be”.This is a classic example of using complicated rules and regulatory oversight in place of transparency.
Outside of the regulators, no one believes that resolutions plans will prove effective in a time of crisis. Resolution plans suffer from the simple problem of in times of crisis, there are very few buyers and the price they are willing to pay for assets drops precipitously. This suggests that capital needs to be even higher to absorb the losses, not lower as Mr. Tucker indicates.
Frankly, bank resolution plans are not preventative. The crisis has to hit first.
Transparency is preventative. Market participants adjust their exposure to what they can afford to lose before the crisis hits. This makes it very simple to close a bank as everyone knows what its exposures are worth.
Central to resolution regimes will be new forms of bail-in debt that would convert into equity and recapitalise banks in place of taxpayer money. “This is for real. This is going to happen,” he said....Another example of substitution of complex rules and regulatory oversight for transparency.
In the absence of ultra transparency, who is going to buy bail in debt? No independent third party would buy bail in debt without the ability to independently assess the risk of the bank.
We know that the independent assessment cannot take place by the simple fact that the interbank lending market is frozen. Banks with deposits to lend do not have the information they need to assess the risk of the banks looking to borrow.
This is no surprise as the Bank of England's Andrew Haldane calls the banks 'black boxes'.
Having bankers buy bail in debt is no solution. Bankers are smart enough to make it an addition to their current compensation packages and not a replacement for 95% of their compensation.